Hot Topics:

It's called the lost decade for a reason

The Lowell Sun

Updated:
01/10/2016 06:37:54 AM EST

I meet so many people who believe they really didn't lose anything during the first decade of this century. This was brought into sharp relief for me during a recent meeting I had with a couple getting ready to retire. I had presented them with a very effective plan, but they were so plugged into their growth equities they were having a difficult time making the transition to income. Like so many, the past few years wiped away the memories of what came before.

"After all, the markets rebounded, right? We got my money back, right?" she asked. "All we had to do was stay the course and everything worked out fine, just like our money manager told us. That's true, right?" (Agree with me so I can get rid of this uneasy feeling in the back of my mind!)

"No," I replied. "It isn't true."

In fact, this is another Wall Street myth. Like so many of them, it's critical for Wall Street that everyone buys in, because if we didn't -- if we began to understand the truth and magnitude of our losses -- there is a good chance many would exit the market never to return.

"The truth is everything did not work out for the better," I continued. "You simply got lucky and weren't completely wiped out. But you sure didn't 'not' lose anything. You lost ten years, and about half your retirement fund."

"Wait, half our retirement fund?" the gentleman asked. "How can you say that? We are way ahead of where we were in 2000."

OK, let's break this down so even a financial planner can understand.

Advertisement

First, were you contributing during that period of time?

"Well, yes. We were contributing the max we could afford. About $5,000 a year."

Over that 10-year period of time, you contributed about $50,000. Do you think that might have something to do with why you believe you are ahead?

"Well, maybe. But not all. I mean we had about $552,226 in 2000, and we have $763,599 today. That's a lot more than $50,000, so I can't really say it has hurt us that much," he responded.

OK, let's figure this out. You started contributing $5,000 a year back in 1985. You managed about a 14.4 percent rate of return, from 1985 to 2000, when you had accumulated $552,226. Then you contributed another $50,000 during the decade beginning 2001 and you had $472,890 by 2010, reflecting a total loss of $129,336 ($552,226 + $50,000 -- $472,890) during that 10-year period. Then the market took off again, and today you have $763,599. The total net return from the time you began was about 7.3 percent. So it looks like you regained everything plus and didn't really lose anything, right?

"That's exactly what we've been saying. It's all good. We have our money back. No harm, no foul."

So did you ever figure out what you could have had if you could have sustained those 14.4 percent rates of return during the lost decade? Or, to make it more realistic, just the 7.3 percent average rate you have received during the entire period?

"Well, no. But why do you keep calling it the lost decade? I thought we decided we didn't really lose anything."

Well, the fact is, if you had continued getting that 7.3 percent rate of return, all the way through from 2000 to today, doing nothing different than you have done, you would have $1,720,752 today instead of $763,599.

That's a loss of: $1,720,752 -- $763,599 = $957,153.

The reason is compound interest. At a 7.3 percent rate of return, your money will double in a little less than 10 years. The lost decade was enough time to lose more than half of what you could have had if you had been able to sustain the momentum from the 1990s. Instead, you actually lost ground during that period; ground that had to be made up.

However, for compounding to work, you must be able to lock in your gains each year and then earn interest on the new amount each year. Markets don't allow that, because to lock in, you have to exit the market. So at any given time, your holdings are just worth whatever the market says they are worth, with no opportunity to take your winnings unless you leave the table.

Now, if you buy into the idea that you can receive 4 percent plus a 3 percent inflation adjustment for the rest of your life, that's a difference of $1,821,477 over a 30-year retirement.

So tell me you didn't lose anything during the lost decade. It's called the lost decade for a reason.

"Free Money Guy" Stephen Kelley can be heard, along with co-host Mark Perkins, on the Free Money Radio Hour at 9 a.m. every Tuesday and Wednesday on 1590 AM WSMN in Nashua, and Sunday at noon on WCAP in Lowell. His financial planning practice, Safety First Financial Planners is located at 33 Main St. in Nashua. He can be reached at 603-881-8811.

Welcome to your discussion forum: Sign in with a Disqus account or your social networking account for your comment to be posted immediately, provided it meets the guidelines. (READ HOW.)
Comments made here are the sole responsibility of the person posting them; these comments do not reflect the opinion of The Sun. So keep it civil.